Government Liable For Negligent Estimate, Court Rules

The government’s use of specifications within a contract carries an implied warranty that the specifications are free from errors. When a contractor is misled by the erroneous specifications, the contractor may seek recovery through an equitable adjustment to the contract. But what happens when the government seeks services through a requirements contract and is simply negligent in estimating its needs?

The underlying contract at issue in Agility Defense was a requirements contract whereby Agility agreed to dispose of as much surplus military property as required by the DLA Defense Reutilization and Marketing Service (“DRMS”). While DRMS had historically performed the underlying services, in 2007, DLA determined it needed help to sustain the workload, and decided to solicit outside contractors.

During the solicitation period, DRMS issued several amendments relevant to the anticipated workload and costs. Amendment 002, issued in February 2007, directed offerors to a website containing DRMS workload history and inventory levels. DRMS updated its website biweekly to reflect line items received, scrap weight, and scrap sales during the prior weeks. Amendment 004, issued in June 2007, stated, “[w]e anticipate an increase in property turn-ins.” The amendment also added clause H.19, which notified contractors of possible significant workload increases or decreases and provided a process for the contract to renegotiate the price in the event of a 150% workload increase when compared to the previous three months. The following month, DRMS issued Amendment 007, which projected a stable workload for the first two years and then workload decreases for option years three through five.

Agility, one of three offerors, received notice of award in November 2007, and was issued its first task orders in early 2008. These task orders incorporated a workload baseline derived from the same website referenced in Amendment 002. Upon starting performance, Agility quickly fell behind after inheriting a backlog of approximately 70,000 line items and a larger volume of line items than anticipated. In response to DRMS’s performance concerns, Agility increased its staffing by 50%. After issues arose concerning the increased workload and interpretation of clause H.19, the parties modified clause H.19 to allow for a price adjustment if the workload increased by more than 25% above monthly averages.

The contract was terminated for convenience in June 2010, and Agility filed a claim to recoup the increased costs of performing the contract. After DRMS awarded only a fraction of costs claimed, Agility pursued its claim in the Court of Federal Claims. The court denied Agility’s claim, finding DRMS’s conduct was acceptable because it provided Agility with “reasonably available historical data.” Upon appeal, the Federal Circuit court disagreed.

In finding DRMS’s estimates unrealistic, the court noted that to prove the government negligently estimated its requirements contract needs, “the contractor must show by preponderant evidence that the government’s estimates were ‘inadequately or negligently prepared, not in good faith, or grossly or unreasonably inadequate at the time the estimate was made.’”

By way of background, for requirements contracts, FAR 16.503 requires contracting officers to provide offerors with a “realistic estimate” of the workload. The FAR caveats this requirement with the following terms:

This estimate is not a representation to an offeror or contractor that the estimated quantity will be required or ordered, or that conditions affecting requirements will be stable or normal. The contracting officer may obtain the estimate from records of previous requirements and consumptions, or by other means, and should base the estimate on the most current information available.

In Agility Defense, the court held that the Court of Federal Claims’ decision was “clearly erroneous” because it ignored that DRMS had provided both historical data and requirements estimates in Amendment 007, and the historical data was not “the most current information available.” Since Amendment 007 projected stable and then declining scrap weight, DRMS estimated that property turn-ins would be constant and then decline.

Furthermore, the court found that providing historical data was not per se reasonable. Since DRMS possessed not only is historical requirements, but also information concerning its anticipated requirements, DRMS was aware of an anticipated surge in workloads. Thus, DRMS could not rely on the fact that it provided historical workload data to satisfy the requirements of FAR 16.503. While “DRMS was not obligated to guarantee the accuracy of its estimates or perfectly forecast its requirements,” DRMA was negligent in not providing Agility was a realistic estimate.

Agility Defense shows that the government is given much latitude in estimating its needs under a requirements contract. However, this is latitude is not unlimited. Where the government’s estimates are unrealistic and not based on the most current information available, a contractor is not left to bear the risk.